strongco corporation management’s discussion and analysis · 2019-05-08 · 1 strongco...

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Strongco Corporation Management’s Discussion and Analysis The following management’s discussion and analysis (“MD&A”) provides a review of the consolidated financial condition and results of operations of Strongco Corporation, Strongco GP Inc. and Strongco Limited Partnership, collectively referred to as “Strongco” or “the Company”, as at and for the year ended December 31, 2017. This discussion and analysis should be read in conjunction with the accompanying audited consolidated financial statements as at and for the year ended December 31, 2017. For additional information and details, readers are referred to the Company’s quarterly unaudited consolidated financial statements and quarterly MD&A for fiscal 2017 and fiscal 2016 as well as the Company’s Annual Information Form (“AIF”) dated March 21, 2018, all of which are published separately and are available on SEDAR at www.sedar.com. Unless otherwise indicated, all financial information within this discussion and analysis is in millions of Canadian dollars except per share amounts. The information in this MD&A is current to March 21, 2018. COMPANY OVERVIEW Strongco is one of the largest multiline mobile equipment distributors in Canada. Strongco sells and rents new and used equipment and provides after-sale product support (parts and service) to customers who operate in infrastructure, construction, mining, oil and gas exploration, forestry and industrial markets. This business distributes numerous equipment lines in various geographic territories. The primary lines distributed include those manufactured by:

i. Volvo Construction Equipment North America Inc. (“Volvo”), for which Strongco has distribution agreements in each of Alberta, Ontario, Quebec, New Brunswick, Nova Scotia, Prince Edward Island and Newfoundland;

ii. Case Corporation (“Case”), for which Strongco has a distribution agreement for a substantial portion of Ontario; and iii. Manitowoc Crane Group (“Manitowoc”), for which Strongco has distribution agreements for the Manitowoc, Grove and

National brands, covering much of Canada. The distribution agreements with Volvo and Case provide Strongco exclusive rights to distribute the products manufactured by these manufacturers in specific regions and/or provinces. In addition to the above noted primary lines, Strongco also distributes several other equipment lines and attachments which are complementary to its primary lines, including Allied Construction, Dressta, ESCO, Fassi, Jekko, Konecranes, Sennebogen, SDLG, Terex Trucks and Terex Cedarapids. Strongco is listed on the Toronto Stock Exchange under the symbol SQP. FINANCIAL AND OPERATING HIGHLIGHTS FOR THE YEAR Income Statement

• Strongco generated revenue of $356.0 million, compared to $361.3 million in 2016. Excluding large non-recurring sales of cranes to the Champlain Bridge project in Quebec in 2016, revenues increased $22.5 million from a year ago. Revenue in the year were impacted by the following factors:

o Higher sales of construction equipment across the country o Higher sales of used equipment, especially in Western Canada o Lower crane sales due to non-recurring sales to the Champlain Bridge project in Quebec in 2016 and weaker

markets for cranes in Ontario o Increased rental revenue, particularly in Western and Central Canada o Higher product support sales (parts and service) in Western and Eastern Canada

• Gross profit of $63.8 million (17.9% of revenue) up from $57.0 million (15.8% of revenue).

• Operating income, before restructuring costs, of $3.7 million compared to a loss of $7.7 million from higher margins and lower operating expenses.

• EBITDA increased to $20.0 million from $5.8 due to improved operating income.

• Interest expense was lower due to reduced interest-bearing debt.

• Pre-tax loss before intangible impairment and restructuring charges $1.5 million, improved from a loss of $13.5 million

• Net loss of $2.2 million ($0.17 per share) compared to net loss from continuing operations of $33.6 million (loss of $2.90 per share).

Balance Sheet

• Equipment inventory of $149.8 million, up from $129.2 million at December 31, 2016. The increase is largely to support increased rental activity.

• Equipment notes payable of $131.0 million, compared to $101.2 million at December 31, 2016.

• Trade and other payables of $37.1 million, down from $46.5 million at December 31, 2016.

• Bank Indebtedness improved at $29.0 million from $30.7 million at December 31, 2016

http://www.sedar.com/

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SUMMARY OF OPERATING RESULTS – CONTINUING OPERATIONS

($ thousands, except per share amounts) 2017 2016 2015 $ Change % Chg $ Change % Chg

Revenue 355,986$ 361,301$ 385,002$ (5,315)$ -1% (23,701)$ -6%

Cost of sales 292,222 304,338 319,845 (12,116) -4% (15,507) -5%

Gross margin 63,764 56,963 65,157 6,801 12% (8,194) -13%

Selling and administrative expenses 61,096 66,007 68,115 (4,911) -7% (2,108) -3%

Other (income) expense (1,008) (1,339) 1,819 331 -25% (3,158) -174%

Operating income (loss) 3,676 (7,705) (4,777) 11,381 -148% (2,928) 61%

Restructuring costs 678 3,605 - (2,927) 3,605

Impairment of intangible asset - 16,499 - (16,499) 16,499

Interest expense 5,231 5,795 7,403 (564) -10% (1,608) -22%

Earnings before income taxes (2,233) (33,604) (12,180) 31,371 -93% (21,424) -176%

Provision for (recovery of) income taxes - 4,745 (3,236) (4,745) -100% 7,981 -247%

Net income (loss) from continuing operations (2,233) (38,349) (8,944) 36,116 -94% (29,405) 329%

Net income (loss) from discontinued operations - 1,036 1,576 (1,036) -100% (540) -34%

Net income (loss) (2,233)$ (37,313)$ (7,368)$ 35,080$ -94% (29,945)$ 406%

Basic and diluted earnings (loss) per share

- continuing operations (0.17)$ (2.90)$ (0.68)$ 2.73$ -94% (2.22)$ 328%

- net income (loss) (0.17) (2.82) (0.56) 2.65 -94% (2.26) 405%

Weighted average number of shares

- Basic and diluted 13,221,719 13,221,719 13,184,278

Key financial measures

Gross margin as a percentage of revenues 17.9% 15.8% 16.9%Selling and administrative expenses as a percentage of revenues17.2% 18.3% 17.7%

Operating income (loss) as a percentage of revenues 1.0% -2.1% -1.2%

EBITDA (see Non-IFRS Measures) 20,039$ 5,770$ 16,217$ 14,269$ 247% (10,447)$ -64%

Balance Sheet Highlights December 31, December 31, December 31,

($ millions) 2017 2016 2015

Trade and other receivables 39.5 37.0 46.3

Total equipment inventory 149.9 129.2 181.3

Parts and Work-in-process 30.6 35.5 35.7

Trade and other payables 37.1 46.4 41.1

Equipment notes payable 131.0 101.2 156.7

Other working capital amounts (0.8) (2.5) (8.5)

Working capital 51.1 51.6 57.0

Property and equipment 11.0 11.7 13.7

Funded debt (see "Non-IFRS Measures") 166.2 139.3 198.1

2017/2016Year Ended December 31 2016/2015

Strongco’s sales of construction equipment, rentals and parts and service were higher in 2017 but lower crane sales resulted in a small overall decline in revenues. Despite the lower revenues, operating profit improved substantially to $3.7 million from a loss of $7.7 million last year due to improved margins and lower expenses, the direct result of the actions taken in 2016 to refocus, simplify and streamline the business. In addition, interest expenses were down from the prior year as a result of reduced aged equipment inventory and the associated interest-bearing debt despite a slight increase in interest rates. Rental activity continued to grow across the country, particularly in Alberta where markets are continuing to recover. In response, Strongco has increased its level of equipment inventory to support the increasing rental activity. The level of equipment inventory on rent at December 31, 2017 was $61.8 million which was up from $39.2 million at the beginning of the year. OUTLOOK While most markets for heavy equipment across Canada experienced modest year over year improvement in 2017, conditions continue to be challenging. Economic conditions in Alberta are continuing to improve and with increased oil prices, a sense of optimism has emerged and there are definite signs of recovery. Construction activity has picked up in the province which has led to increased demand for equipment. However, an air of caution remains which has resulted in a shift more towards used equipment and rentals as markets continue to slowly recover.

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Similarly, in Ontario, while construction activity is more buoyant, most activity is of a smaller scale and there remains an overall air of caution which is affecting the purchase decisions for heavy equipment. With no new infrastructure spending announced by the Ontario government and few large projects underway or planned for the near term, larger scale construction activity is expected to remain low and demand for heavy equipment, especially GPE, and cranes is not expected to increase significantly. In this uncertain environment, as customers are more reticent to purchase new equipment, demand for rentals and used equipment in Ontario has increased. In Quebec and the Atlantic regions of the country, overall demand for heavy equipment is expected to remain unchanged in the near term, although the longer-term outlook is for continued modest improvement. With no plans for significant new government infrastructure spending and no meaningful uptick in housing, construction activity in these regions is expected to remain weak in the near term. With strength in the price of gold and some improvement in iron ore prices, mining activity in northern regions of Quebec has picked up which has led to increasing demand for associated heavy equipment. As the majority of heavy equipment is priced in US dollars, the weaker Canadian dollar has resulted in rising costs for new equipment to Canadian dealers and it has become more difficult for dealers to pass on these higher costs, This is expected to continue to put pressure on sales and margins and cause customer to look to used equipment and rentals to meet their needs. Competition is expected to remain strong especially from dealers carrying lower cost tier 3 product, which will continue to impact sales and margins. With this economic backdrop, the overall markets for heavy equipment across Canada are expected to show continued improvement in 2018. While encouraged by the improvement in the Company’s results in 2017, management remains cautiously optimistic regarding the outlook for 2018. The strategic actions initiated in 2016 and 2017 to simplify and streamline the business, reduce expenses and increase operational efficiencies have resulted in an improved cost structure and balance sheet and positioned Strongco to generate improved profitability in the future as markets continue to recover. FINANCIAL RESULTS – ANNUAL Market Overview Strongco participates in a number of geographic regions and in a wide range of end-use markets that utilize heavy equipment and cranes and which may have differing economic cycles. Construction markets generally follow the cycles of the broader economy, but typically lag by periods ranging up to 12 months. When construction markets are robust, demand for heavy equipment is normally strongest. In addition, as the financial resources of heavy equipment customers strengthen, they have historically replenished and upgraded their fleets after a period of restrained capital expenditures. Demand in oil and gas and mining markets is affected by the economy but also tends to be driven by the global demand and pricing of the relevant commodities. Activity in equipment markets is normally first evident in equipment used in earth moving applications and followed by cranes, which are typically utilized in later phases of construction. Cranes are also extensively utilized in the oil and gas sector. Rental of heavy equipment is typically greater following periods of recession until confidence is restored and financial resources of customers improve. However, over the last several years rental activity has remained strong even when markets were robust and is expected to continue to grow. Economic conditions in Canada showed signs of improvement in 2017. Construction activity increased during the year but most of the activity has been in and around major urban centers and mainly related to high-rise office and condominium construction and other smaller scale infrastructure projects which utilize types of equipment not offered by Strongco. By comparison, Strongco’s products are typically used more extensively in larger scale infrastructure projects, mining and low-rise housing development – all of which continued to be negatively impacted by ongoing weak oil prices, soft commodity prices and lack of government spending which dampened demand for heavy equipment and cranes. In this environment, competition has intensified, especially from dealers carrying tier 3 product and offering discounted financing and margins continued to be under pressure. but continued to be impacted While Strongco’s markets overall remain soft, modest recovery has been evident in certain sectors and regions of the country resulting in increased demand for construction equipment. However, the market for cranes, especially larger cranes, remained soft across the country. Alberta in particular has begun to show signs of recovery, although demand for heavy equipment remained well below historic averages. Rental activity continued to increase across the country as more customers are choosing to rent or rent with an option to purchase. In addition, an air of caution exists in Alberta and other regions of the country which continues to impact customer purchase decisions and result in more customers choosing to rent equipment or purchase used machines. Rental activity and sales of used equipment were stronger in 2017.

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Revenues A breakdown of revenue for the years ended December 31, 2017, 2016 and 2015 is as follows:

2017/2016 2016/2015

($ millions) 2017 2016 2015 % Chg % Chg

Eastern Canada (Atlantic and Quebec)

Equipment Sales 66.9$ 87.4$ 82.2$ -23% 6%

Equipment Rentals 5.3 6.4 5.6 -17% 14%

Product Support 48.2 43.5 41.2 11% 6%

Total Eastern Canada 120.4$ 137.3$ 129.0$ -12% 6%

Central Canada (Ontario)

Equipment Sales 101.9$ 103.2$ 108.4$ -1% -5%

Equipment Rentals 6.7 6.0 7.2 12% -17%

Product Support 40.2 42.2 44.1 -5% -4%

Total Central Canada 148.8$ 151.4$ 159.7$ -2% -5%

Western Canada (Manitoba to British Columbia)

Equipment Sales 57.1$ 48.9$ 62.0$ 17% -21%


Product Support 24.9 20.7 28.3 20% -27%

Total Western Canada 86.8$ 72.6$ 96.3$ 20% -25%

Total Revenue

Equipment Sales 225.9$ 239.5$ 252.6$ -6% -5%


Product Support 113.3 106.4 113.6 6% -6%

Total 356.0$ 361.3$ 385.0$ -1% -6%

Years Ended December 31

For the year ended December 31, 2017, total revenues were $356.0 million compared to $361.3 million in 2016, down $5.3 million or 1%. Most of the decline was in Quebec due to fewer sales of cranes to the Champlain Bridge project. Excluding the large sales to the Champlain Bridge project in 2016, revenues for the year were up by $22.5 million or 7% from 2016 with growth in all revenue categories. The following factors affected revenues in 2017:

• Total equipment sales were down by $13.6 million or 6% due primarily to sales to the Champlain Bridge project in Quebec in 2016 and lower crane sales in Ontario. Excluding the crane sales to the Champlain Bridge project, equipment sales were up $14.2 million or 7% year over year. Sales were particularly strong in Western Canada due to greater sales of excavators, loaders and cranes, combined with higher sales of used equipment.

• Rental revenues were higher in Central and Western regions of the country as demand for equipment increased and more customers chose to rent as markets continued to recover.

• Product support revenues were particularly strong in Quebec and Alberta due to higher customer fleet utilization generally as construction activity increased and a few large jobs to refurbish customers’ equipment early in the year.

Gross Profit

($ millions)

Gross Profit GM% GM% GM% $ Change % Chg $ Change % Chg

Equipment Sales 17.7$ 7.8% 12.3$ 5.1% 15.1$ 5.9% 5.4$ 44% (2.8)$ -19%

Equipment Rentals 2.3 13.5% 2.3 14.9% 3.4 18.1% - 0% (1.1) -32%

Product Support 43.8 38.7% 42.4 39.8% 46.7 41.1% 1.4 3% (4.3) -9%

Total Gross Profit 63.8$ 17.9% 57.0$ 15.8% 65.2$ 16.9% 6.8$ 12% (8.2)$ -13%

2017/2016 2016/20152017 2016 2015

Year Ended December 31

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Strongco’s overall gross profit was $63.8 million or 17.9% of revenue in 2017, up from $57.0 million or 15.8% last year. Despite the lower revenues, gross profit was higher in the year due to an improved overall gross margin as a percent of revenue. The improvement in the overall gross margin was due primarily to higher rental and product support revenues and stronger margins on equipment sales. By revenue category gross margin was impacted by the following:

• Gross margin on equipment sales was higher in 2017 as in 2016, large quantities of aged and non-core equipment inventory was sold at auction at lower margins and losses as part of the Company’s strategy to reduce aged inventory and focus on its core brands.

• Gross margin on rentals was lower due to a higher proportion of rentals with purchase options which typically have lower margins than rentals without purchase options.

• The gross margins on parts and service in the year were slightly lower than the prior year resulting from lower service margins on a few large jobs to refurbish customers’ equipment in Alberta and Quebec in the first quarter.

Selling and Administrative Expense Administrative, distribution and selling expense in 2017 were $61.1 million or 17.2% of revenue, down from $66.0 million or 18.3% of revenue in 2016. The decrease was primarily the result of the actions taken in 2016 and first quarter of 2017 to restructure the business and reduce headcounts and other cash expenses. In addition, depreciation was lower related to the SAP computer system, which was fully impaired in the third quarter 2016. Headcount at December 31, 2017 stood at 500, which was down 32 employees from the beginning of the year. Net warranty recovery was lower in the year as a result of a lower level of warranty work and reduced recoveries, which partially offset the overall expense reduction. In addition, given the improved operating performance in 2017, bonuses were higher than in the prior year. Other Income and Expense Other income is primarily comprised of foreign exchange gains or losses, gains or losses on disposition of fixed assets, service fees received by Strongco as compensation for sales of new equipment by other third parties in the regions where Strongco has distribution rights for that equipment and commissions received from third party financing companies for customer purchase financing Strongco places with such finance companies. Strongco typically carries US dollar liabilities related to the purchase of equipment inventory and parts. With the significant volatility that has occurred from one period to the next in the value of the Canadian dollar relative to the US dollar, foreign exchange gains and losses have arisen on the translation of US dollar liabilities. Other income and expense in 2017 was net income of $1.0 million, composed primarily of foreign exchange gains that arose on the translation of US dollar liabilities. This compared to net income, mainly foreign exchange gains, of $1.3 million in 2016. Operating Income Despite lower revenues, improved gross profit and lower selling and administrative expenses resulted in operating income, before restructuring costs, of $3.7 million in 2017, which was significantly improved from an operating loss of $7.7 million, before restructuring costs and the impairment of intangible asset, in 2016. After restructuring costs, operating income was $3.0 million in 2017, compared to an operating loss of $11.3 million in 2016. Restructuring Costs In response to ongoing weak economic conditions during 2016, particularly in Alberta, management restructured the business to reduce costs, streamline the business and improve the balance sheet. As part of this restructuring headcount was reduced by 59 employees or 10% in 2016, resulting in a restructuring provision of $3.6 million for severance and other termination costs. Headcount was reduced by an additional 32 people during 2017. In addition, in the first quarter of 2017, the Company closed its branch in Orillia, Ontario and terminated the lease. As a result of these actions, a restructuring provision of $0.7 million for severance and other termination costs of employees and lease termination costs of the Orillia facility was recorded. While the Company has exited the Orillia branch, it is still servicing customers in the region through sales and service personnel covering the territory as well as providing service and parts from its Mississauga and Sudbury, Ontario locations. Interest Expense Strongco’s interest-bearing debt comprises interest-bearing equipment notes and an operating line with the Company’s bank. Strongco typically finances equipment inventory under lines of credit available from various finance companies, many of which are the captive finance affiliate of the OEM supplier. Most equipment financing has interest-free periods of up to 12 months from the date of financing, after which the equipment notes become interest-bearing. The rate of interest on the Company’s bank

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operating lines and interest-bearing equipment notes payable vary with bank prime rates and Bankers’ Acceptance rates (“BA rates”). (See discussion under “Cash Flow, Financial Resources and Liquidity.”) The Bank of Canada overnight lending rate increased by 50 bps in 2017 with a corresponding increase in prime rates and BA rates. This did not have a significant impact on Strongco’s total interest expense in 2017. As part of the Company’s restructuring efforts in 2016, there was a significant reduction in aged and non-core equipment inventory and the related interest-bearing debt. This resulted in in lower interest expense in 2017. Interest expense was $5.2 million in 2017, compared to $5.8 million in 2016. Loss Before Income Taxes Before restructuring costs, the loss before tax was $1.5 million which compared to a pre-tax loss before the non-cash impairment charge and restructuring costs of $13.5 million in 2016. After restructuring costs, the pre-tax loss was $2.2 million in 2017. Provision for / Recovery of Income Taxes Given the Company’s history of losses, there was uncertainty whether the tax losses incurred during 2017 and 2016 would be recovered in the future. As a result, no recovery of income taxes has been recorded against the losses in the year. During 2016, management reassessed the recoverability of deferred tax assets recorded against losses from prior periods and determined a provision was warranted to reflect the uncertainty of recoverability resulting a net income tax expense of $4.7 million in 2016. Net Loss from continuing operations

Strongco’s net loss in 2017 was $2.2 million ($0.17 per share) compared to a net loss from continuing operations of $38.3 million ($2.90 per share). EBITDA EBITDA in 2017 was $20.0 million (5.6% of revenue) which compared to $5.8 million (1.6% of revenue) in 2016 and $16.2 million (4.2% of revenue) in 2015. EBITDA was calculated as follows:

EBITDA ($ millions) 2017 2016 2015 2017/2016 2016/2015

Net loss from continuing operations (2.2)$ (38.3)$ (8.9)$ 36.1$ (29.4)$

Add back:

Interest 5.2 5.8 7.4 (0.6) (1.6)

Income taxes - 4.7 (3.2) (4.7) 7.9

Impairment of intangible asset - 16.5 - (16.5) 16.5

Depreciation of capital assets 2.9 3.9 5.6 (1.0) (1.7)

Depreciation of equipment inventory on rent 13.7 11.8 13.6 1.9 (1.8)

Depreciation of rental fleet 0.4 0.5 1.3 (0.1) (0.8)

Amortization of computer system - 0.9 0.4 (0.9) 0.5

EBITDA (see non-IFRS Measures) 20.0$ 5.8$ 16.2$ 14.2$ (10.4)$

Year Ended December 31 Change

Cash Flow, Financial Resources and Liquidity Cash Flow Provided By (Used In) Operating Activities from Continuing Operations: In 2017, cash of $21.5 million was provided by operating activities from continuing operations before changes in working capital. By comparison, in 2016, operating activities from continuing operations provided $7.8 million of cash before changes in working capital. After changes in working capital, cash provided by operating activities was $4.5 million compared to $4.9 million of cash used in operating activities from continuing operations in 2016. The components of the cash provided by/(used in) operating activities were as follows:

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($ millions) 2017 2016

Net income (loss) for the period (2.2) (37.3)

Net income from discontinued operations - (1.0)

Net income from continuing operations $ (2.2) $ (38.3)

Non-cash items:

Depreciation – equipment inventory on rent 13.7 11.8

Depreciation – capital assets 2.9 3.9

Depreciation – rental fleet 0.4 0.5

Amortization of computer system - 0.9

Impairment of computer system - 16.5

Gain on sale of rental fleet (0.2) -

Share-based payment expense - 0.1

Interest expense 5.2 5.8

Income tax expense - 4.7

Employee future benefit expense 1.7 1.9

21.5 7.8

Changes in non-cash working capital balances (11.4) (4.4)

Purchase of rental fleet (0.1) 0.0

Proceeds from sale of rental fleet 0.5 0.0

Employee future benefit funding (1.9) (2.0)

Interest paid (5.3) (6.3)

Income tax receovery received 1.1 -

Cash provided by (used in) operating activities

- continuing operations 4.4 (4.9)

- discontinued operations 0.0 2.0

Cash provided by (used in) operating activities $ 4.4 $ (2.9)


Non-cash items include depreciation of equipment inventory on rent of $13.7 million, which compared to $11.8 million in 2016. During 2017, there was a net increase in non-cash working capital from continuing operations of $11.4 million resulting primarily from a decrease in trade and other payables. Inventories increased in the year, largely to support the increase in rental activity, but this was offset by an increase in equipment notes payable. By comparison, during 2016, there was a net increase in non-cash working capital from continuing operations of $4.4 million. Components of cash flow from the net change in non-cash working capital from continuing operations for 2017 and 2016 were as follows:

Trade and other receivables at December 31, 2017 were $39.5 million, up from $37.0 million at December 31, 2016 due to higher revenues in the last quarter. The average age of receivables at end of the year has improved compared to the end of 2016. Equipment inventory at the end of 2017 was $149.9 million, up from $129.2 million a year earlier. While equipment inventory levels declined in 2016 as a result of management’s actions to reduce aged and non-core machines, new inventory was purchased in 2017 to support the increasing demand in the market, especially increasing demand for equipment for rent as markets continued to recover. At December 31, 2017, Strongco had $61.8 million of equipment on rent, both short-term rental contracts and contracts with purchase options, which was up from $39.2 million at the same time last year.

($ millions)

(Increase) Decrease 2017 2016

Trade and other receivables $ (2.4) $ 9.3

Income taxes receivable - (1.5)

Inventories (29.6) 40.5

Prepaids and other assets 0.4 0.6

$ (31.6) $ 48.9

Increase (Decrease)

Trade and other payables (9.3) 7.4

Deferred revenue and customer deposits (0.3) (5.2)

Equipment notes payable 29.8 (55.5)

$ 20.2 $ (53.3)

Net increase in non-cash working capital from continuing operations $ (11.4) $ (4.4)


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A breakdown of equipment inventory at December 31, 2017 compared to prior quarters is as follows:

($ millions)

Equipment in-stock $ 88.1 $ 99.5 $ 88.5 $ 90.5 $ 90.0

Equipment on RPO 33.4 36.3 29.1 15.9 14.8

Equipment on a

short-term rental contract 28.4 18.5 13.2 14.7 24.4

Equipment inventory - total $ 149.9 $ 154.3 $ 130.8 $ 121.1 $ 129.2

June 30,

2017

March 31,

2017

December 31,

2017

December 31,

2016

September 30,

2017

Equipment notes payable at December 31, 2017 was $131.0 million up from $101.2 million at the end of 2016. With the increase in equipment inventory, equipment notes payable have increased. A breakdown of equipment notes payable at December 31, 2017 and the change throughout the year is as follows:

($ millions)

Non-interest-bearing $ 38.9 $ 58.5 $ 54.7 $ 33.7 $ 26.7

Interest-bearing 92.1 73.9 64.8 69.9 74.5

Equipment notes - total $ 131.0 $ 132.4 $ 119.5 $ 103.6 $ 101.2

June 30,

2017

March 31,

2017

December 31,

2017

December 31,

2016

September 30,

2017

Trade and other payables at December 31, 2017 were $37.1 million down from $46.4 million at December 31, 2016, primarily as a result of the timing of receipts of equipment and parts inventory and timing in payment of amounts owing to suppliers. Cash Provided By (Used In) Investing Activities of Continuing Operations: Net cash provided by investing activities of continuing operations amounted to $1.2 million in 2017, primarily funds released from escrow related to the sale of the Company’s U.S. subsidiary, Chadwick-BaRoss Inc., in 2016. By comparison, in 2016 cash of $8.7 million was provided by investing activities of continuing operations, most of which are related to the proceeds from the sale of Chadwick-BaRoss Inc. The components of cash provided by investing activities from continuing operations were as follows:

($ millions) 2017 2016

Proceeds from sale of Chadwick-BaRoss Inc. $ - $ 15.7

Repayment of amounts owing to related party - (5.3)

Released from (deposited to) escrow 1.6 (1.6)

Net proceeds from sale of Chadwick-BaRoss Inc. 1.6 8.8

Purchase of capital assets (0.4) (0.1)

Cash provided by (used in) investing activities

- continuing operations 1.2 8.7

- discontinued operations - (0.1)

Cash provided by investing activities 1.2$ 8.6$


Cash Provided By (Used in) Financing Activities in Continuing Operations: For the twelve months ended December 31, 2016, $5.6 million of cash was used in financing activities in continuing operations, reducing bank indebtedness and long-term equipment notes, and repaying finance leases. During the 2016, cash of $3.7 million was used in financing activities to service debt obligations.

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The components of cash used in financing activities from continuing operations are summarized as follows:

($ millions) 2017 2016

Increase (decrease) in bank indebtedness $ (1.7) $ (2.1)

Repayment of finance lease obligations (2.6) (3.0)

Repayment of notes payable (1.3) (0.5)

Advances from disposed operations - 0.7

Loans repaid to disposed operations - (0.4)

Trade activities with disposed operations - 1.0

Dividends from disposed operations - 0.6

Cash provided by (used in) financing activities

- continuing operations (5.6) (3.7)


Cash provided by (used in) financing activities (5.6) (6.2)


Bank Credit Facilities The Company has credit facilities with a bank in Canada. Operating Lines The Canadian bank credit facility is a revolving demand facility which provides an operating line $30 million. Borrowings under the operating line is limited by standard borrowing base calculations based on accounts receivable and inventory, which are typical of such bank credit facilities. As collateral, the Company has provided a security interest in accounts receivable, inventories (subordinated to the collateral provided to the equipment inventory lenders), capital assets (subordinated to collateral provided to lessors), real estate and other assets. The bank operating line bears interest at rates that vary with bank prime rates or Bankers Acceptances Rates (“BA rates”). Interest rates range between bank prime rate plus 2.00% and bank prime rate plus 4.00% or between the one-month Canadian BA rate plus 3.00% and the one-month Canadian BA rate plus 5.00%, depending on the Company’s ratio of debt to tangible net worth. Under its bank credit facilities, the Company is able to issue letters of credit up to a maximum of $5 million. Outstanding letters of credit reduce availability under the Company’s operating lines of credit. For certain customers, Strongco issues letters of credit as a guarantee of Strongco’s performance on the sale of equipment to the customer. At December 31, 2017, there were outstanding letters of credit totaling $0.01 million. In addition to its operating lines of credit, Strongco has a line of approximately US$18.4 million for foreign exchange forward contracts as part of its bank credit facilities (“FX Line”) available to hedge foreign currency exposure. Under this FX Line , the Company can purchase foreign exchange forward contracts up to a maximum of US$18.4 million. As at December 31, 2017, the Company had outstanding foreign exchange forward contracts under this facility totaling US$10.2 million at an average exchange rate of $1.2590 Canadian for each US$1.00 with settlement dates between January 2018 and September 2018. Bank Financial Covenants The bank credit facilities in Canada contain financial covenants typical of such credit facilities that require the Company to maintain certain financial ratios and meet certain financial thresholds. A summary of the financial covenants under the bank credit facilities at December 31, 2017 is as follows:

• Minimum ratio of total current assets to current liabilities (“Current Ratio covenant”) of 1.0:1,

• Minimum tangible net worth (“TNW covenant”) of $20 million,

• Maximum ratio of debt to tangible net worth (“Debt to TNW Ratio covenant”) of 7.00:1, and

• Minimum ratio of EBITDA to total interest (“Interest Coverage Ratio covenant”) of 2.50:1. In addition to these financial covenants, the Company’s bank credit facility requires the Company to remain in compliance with the financial covenants under all of its other lending agreements (“cross default provisions”). The Company was in compliance with the financial covenants under its bank credit facilities at December 31, 2017. Equipment Notes In addition to its bank credit facilities, the Company has lines of credit available totaling approximately $168 million from various non-bank equipment lenders in Canada that are used to finance equipment inventory and rental fleet. At December 31, 2017, there was approximately $131 million borrowed on these equipment finance lines. Typically, these equipment notes are interest-free for periods of up to 12 months from the date of financing, after which they bear interest in Canada at variable rates based upon 30-day and 90-day Bankers’ Acceptance rates (“BA”), the prime rate of a Canadian

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chartered bank, and 30-day and 90-day LIBOR rates plus the financing company’s margin. As at December 31, 2017, the rates ranged from 5.20% to 7.88% with a weighted average effective rate of 6.29%. As collateral for these equipment notes, the Company has provided liens on the specific inventory financed and any related accounts receivable. In the normal course of business, these liens cover substantially all of the inventories. Monthly principal repayments equal to 3.00% of the original principal balance of the note commence 12 months from the date of financing and the remaining balance is due in full at the earlier of 24 months after financing or when the financed equipment is sold. While financed equipment is out on rent, monthly curtailments are required equal to the greater of 70% of the rental revenue and 2.5% of the original value of the note. Any remaining balance after 24 months, which is due in full, is normally refinanced with the lender over an additional period of up to 24 months. All of the Company’s equipment notes facilities are renewable annually. Equipment Notes Financial Covenants Two of the Company’s equipment finance credit agreements contain restrictive financial covenants, similar to the bank credit facility, that require the Company to remain in compliance with certain financial covenants, including requiring the Company to remain in compliance with the financial covenants under all of its other lending agreements (“cross default provisions”). Under the equipment finance agreements, the covenants are identical to those under the Company’s bank agreement and the Company was in compliance with those covenants at December 31, 2017. Summary of Outstanding Debt The balance outstanding under Strongco’s debt facilities at December 31, 2017 and 2016 consisted of the following:

Debt Facilities As at December 31

($ millions) 2017 2016

Bank indebtedness (including outstanding cheques) $ 29.0 $ 30.7

Equipment notes payable – non-interest-bearing 38.9 26.7

Equipment notes payable – interest-bearing 92.1 74.5

Rental fleet equipment notes payable - 1.2

Debt facilities - total $ 160.0 $ 133.1 Total borrowing under the Company’s debt facilities was $160.0 million at December 31, 2017 compared to $133.1 million a year ago. The increase of $26.9 million was due to the increase in equipment notes payable supporting increased equipment inventories, primarily as a result of increased rental activity. As at December 31, 2017, there was $7 million of unused credit available under the Company’s bank credit lines. While availability under the bank lines fluctuates daily depending on the amount of cash received and cheques and other disbursements clearing the bank, availability normally ranges between $1 million and $8 million. The Company also had approximately $37 million available under its equipment finance facilities at December 31, 2017.

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FINANCIAL HIGHLIGHTS – FOURTH QUARTER Income Statement

• Strongco generated revenue of $93.6 million, compared to $81.2 million in the fourth quarter of 2016. Revenue in the quarter was impacted by the following factors:

o Higher construction equipment sales in Eastern and Central Canada o Sale of several large cranes to a power station in Northern Ontario o Increased rental revenue, particularly in Western Canada o Higher product support sales (parts and service) in Western and Eastern Canada

• Gross profit of $17.3 million (18.5% of revenue) up from $11.9 million (14.7% of revenue).

• Operating income of $0.6 million compared to a loss of $4.4 million, before restructuring costs, from higher margins and lower operating expenses.

• EBITDA increased to $6.0 million from a loss of $0.2 million due to improved operating income.

• Interest expense was slightly higher due to increased interest-bearing equipment finance debt.

• As a result of improved operating earnings, loss before tax for the quarter decreased to $0.9 million from a loss of $5.8 million before restructuring charges.

• Net loss of $0.9 million ($0.07 per share) compared to net loss from continuing operations of $6.1 million (loss of $0.46 per share).

SUMMARY OF OPERATING RESULTS – FOURTH QUARTER

($ thousands, except per share amounts) 2017 2016 $ Change % Change

Revenue 93,572$ 81,206$ 12,366$ 15%

Cost of sales 76,270 69,305 6,965 10%

Gross margin 17,302 11,901 5,401 45%

Selling and administrative expenses 16,735 16,830 (95) -1%

Other income (47) (572) 525 n/a

Operating income (loss) 614 (4,357) 4,971 -114%

Restructuring costs - 418 (418) n/a

Interest expense 1,515 1,401 114 8%

Loss before income taxes (901) (6,176) 5,275 -85%

Recovery of income taxes - (126) 126 -100%

Net income (loss) from continuing operations (901) (6,050) 5,149 -571%

Net income (loss) from discontinued operations - (214) 214 n/a

Net loss (901)$ (6,264)$ 5,363$ -86%


- continuing operations (0.07)$ (0.46)$ 0.39$ -0,085%

- net loss (0.07)$ (0.47)$ 0.41$ -0,086%

Weighted average number of shares

- Basic and diluted 13,221,719 13,221,719

Key financial measures

Gross margin as a percentage of revenues 18.5% 14.7%

Selling and administrative expenses as a percentage of revenues 17.9% 20.7%

Operating income as a percentage of revenues 0.7% -5.4%

EBITDA (see non-IFRS Measures) 5,938$ (203)$ 6,141$ -3025%

Three Months Ended

December 31 2017/2016

Strongco’s sales of construction equipment and cranes, equipment rentals and parts and service were all higher in the final quarter of 2017. The higher revenue and improved margins on sales contributed to significantly higher gross profit, and combined with lower operating expenses, resulted in an operating profit of $0.6 million in the fourth quarter which was substantially improved from a loss of $4.4 million last year. Interest expenses were slightly higher in the quarter from higher equipment financing but the loss before tax of $0.9 million was substantially improved from the pretax loss of $5.8 million, before restructuring costs, in the fourth quarter of 2016. Rental activity continued to grow across the country, particularly in Alberta where markets are continuing to recover. In response, Strongco has increased its level of equipment inventory to support the increasing rental activity. Equipment inventory on rent at December 31, 2017 was $62.3 million which was up from $41.0 million at the beginning of the year.

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Revenues A breakdown of revenue for the three months ended December 31, 2017 and 2016 is as follows:

2017/16

($ millions) 2017 2016 % Chg

Eastern Canada (Atlantic and Quebec)

Equipment Sales 20.9$ 13.3$ 57%

Equipment Rentals 1.7 2.1 -19%

Product Support 12.1 10.6 14%

Total Eastern Canada 34.7$ 26.0$ 33%

Central Canada (Ontario)


Equipment Rentals 2.1 1.7 24%

Product Support 9.9 10.0 -1%

Total Central Canada 40.9$ 35.5$ 15%

Western Canada (Manitoba to British Columbia)

Equipment Sales 10.5$ 13.9$ -24%



Total Western Canada 18.0$ 19.7$ -9%

Total Equipment Distribution




Total Equipment Distribution 93.6$ 81.2$ 15%

Three Months Ended December 31

For the three months ended December 31, 2017, total revenues were $93.6 million compared to $81.2 million in the same period of 2016, up $12.4 million or 15%. Total revenues were up year over year in all revenue streams. Gross Margin

($ millions)

Gross Margin GM% GM% $ Change % Change

Equipment Sales 5.9$ 9.8% 2.0$ 3.9% 3.9$ 195%

Equipment Rentals 0.7 13.3% 0.6 13.0% 0.1 17%

Product Support 10.7 38.5% 9.3 36.3% 1.4 15%

Total Gross Margin 17.3$ 18.5% 11.9$ 14.7% 5.4$ 45%

2017/20162017 2016


Strongco’s overall gross profit was $17.3 million or 18.5% of revenue in the fourth quarter of 2017, up from $11.9 million or 14.7% in the same period last year. Gross profit was higher in the quarter due to higher revenues and an improved overall gross margin as a percent of revenue. The improvement in the overall gross margin was due improved margins on all revenue streams, particularly equipment sales which were impacted by a reserve for aged inventory in the fourth quarter 2016. By revenue category, gross margin was impacted by the following:

• Gross margin on equipment sales was higher as in 2016 a large quantity of aged and non-core equipment inventory was sold at auction at lower margins and in some cases losses as part of the Company’s strategy to reduce aged inventory.

• Gross margin on rentals was higher in the fourth quarter of 2017 due to higher proportion of rentals without purchase options which typically have higher margins than rentals under RPO contracts.

• The gross margins on parts and service in the quarter increased from the prior year resulting from improved margins on parts sales.

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Selling and Administrative Expense Administrative, distribution and selling expense in the fourth quarter of 2017 were $16.7 million, or 17.9% of revenue, compared to $16.8 million, or 20.7% of revenue in the fourth quarter of 2016. The Company has made significant progress in reducing expenses in response to the challenging market conditions, especially in Alberta. In particular, headcount and other people related costs were down significantly year over year. While operating expenses were down in the fourth quarter as a result of these actions, a provision against aged warranty claims receivable where there is some uncertainty of recoverability and accruals for management bonus resulted in total operating expenses being flat year over year. Other Income and Expense Other income is primarily comprised of foreign exchange gains or losses, mark to market adjustments on foreign exchange contracts, gains or losses on disposition of fixed assets, service fees received by Strongco as compensation for sales of new equipment by other third parties in the regions where Strongco has distribution rights for that equipment and commissions received from third party financing companies for customer purchase financing Strongco places with such finance companies. Other income in the fourth quarter of 2017 netted to $nil as foreign exchange gains were offset by mark to market adjustments on foreign exchange contracts. By comparison, in the fourth quarter of 2016, other income was $0.6 million comprised mainly of foreign exchange gains. Operating Loss Higher gross profit and essentially stable operating expenses, resulted in operating income of $0.6 million in the fourth quarter of 2017, compared to an operating loss, before restructuring costs, of $4.4 million in the same quarter last year. Interest Expense Strongco’s interest expense was $1.5 million in the fourth quarter of 2017, compared to $1.4 million in the fourth quarter of 2016 as a result of a higher level of interest-bearing equipment notes financing the increase in equipment inventory on rent. Loss Before Income Taxes After interest, the pre-tax loss was $0.9 million in the fourth quarter of 2017 compared to an operating loss after interest and restructuring costs of $6.2 million in the same period in 2016. Provision for Income Tax Due to the uncertainty of recovering losses, no recovery of income taxes has been recorded against the loss in the fourth quarter. The provision for income tax recovery in the fourth quarter of 2016 was $0.2 million adjusting the deferred tax asset to the expected net recoverable amount. Net Loss from continuing operations

Strongco’s net loss in the fourth quarter of 2017 was $0.9 million ($0.07 per share), which compared to net loss of $6.3 million ($0.47 per share) in the same quarter of the prior year. EBITDA EBITDA in the fourth quarter of 2017 was $5.9 million (6.3% of revenues), compared to a loss of $0.2 million (0.2% of revenue) in the fourth quarter of 2016. EBITDA is calculated as follows:

Change

EBITDA ($ millions) 2017 2016 2017/2016

Net earnings from continuing operations (0.9)$ (6.1)$ 5.2$

Add back:

Interest 1.5 1.4 0.1

Income taxes - (0.1) 0.1

Depreciation of capital assets 0.6 1.0 (0.4)

Depreciation of equipment inventory on rent 4.6 3.5 1.1

Depreciation of rental fleet 0.1 0.1 -

EBITDA (see non-IFRS Measures) 5.9$ (0.2)$ 6.1$


Cash Flow, Financial Resources and Liquidity

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Cash Flow Provided By (Used In) Operating Activities from Continuing Operations: During the fourth quarter of 2017, Strongco provided $6.3 million of cash from operating activities from continuing operations before changes in working capital, which compared to $0.4 million in the same quarter last year. An increase in non-cash working capital used $6.8 million of cash in the quarter. After funding future employee benefits of $0.5 million, paying interest of $1.5 million and receiving income refunds for loss carry backs of $1.1 million, cash used in operating activities of continuing operations was $1.4 million. By comparison, in the fourth quarter of 2016, the decrease in non-cash working capital provided $2.7 million of cash, $0.5 million was used to fund future employee benefits and $1.5 million to pay interest, resulting in net cash provided by operating activities from continuing operations of $1.1 million. The components of the cash used in operating activities from continuing operations were as follows:

($ millions) 2017 2016

Net loss for the period (0.9) (6.2)

Net (income) loss from discontinued operations - 0.2

Net loss from continuing operations $ (0.9) $ (6.0)

Non-cash items:

Depreciation – equipment inventory on rent 4.7 3.5

Depreciation – capital assets 0.6 1.0

Depreciation – rental fleet - 0.1

Interest expense 1.5 1.4

Income tax expense - (0.1)

Employee future benefit expense 0.4 0.5

6.3 0.4

Changes in non-cash working capital balances (6.8) 2.7

Employee future benefit funding (0.5) (0.5)

Interest paid (1.5) (1.5)

Income tax recovery received 1.1 -

Cash provided by (used in) operating activities

- continuing operations (1.4) 1.1

- discontinued operations 0.0 0.1

Cash provided by (used in) operating activities $ (1.4) $ 1.2


Non-cash items in the quarter include depreciation of equipment inventory on rent of $4.7 million, compared to $3.5 million in the fourth quarter of 2016. During the fourth quarter of 2017, non-cash working capital from continuing operations increased by $6.8 million due primarily to decreases in trade payables offset partially by a reduction in trade receivables, as shown in the table below. By comparison, during the fourth quarter of 2016, net working capital decreased by $2.7 million due to a large reduction in trade receivables and inventories substantially offset partially by repayments of equipment notes payable. Components of cash flow from the net change in non-cash working capital from continuing operations for 2017 and 2016 are as follows:

($ millions)

(Increase) Decrease 2017 2016

Trade and other receivables $ 3.7 $ 12.8

Income tax receivable - (1.5)

Inventories 1.6 15.2

Prepaids and other assets 0.3 0.6

$ 5.6 $ 27.1

Increase (Decrease)

Trade and other payables (11.4) 2.2

Deferred revenue and customer deposits 0.3 0.1

Equipment notes payable (1.3) (26.7)

$ (12.4) $ (24.4)

Net decrease in non-cash working capital from continuing operations $ (6.8) $ 2.7


As noted above, equipment inventory and floor plan debt decreased in the last quarter of 2017. Equipment inventory at the end of the fourth quarter was $149.8 million, declining from $154.4 million at September 30, 2017, and compared to $129.1 million at the previous year end. Consistent with the reduction in equipment inventory, equipment notes declined from $132.4 million at September 30, 2017 to $131.0 million at December 31, 2017, and compared to $101.2 million at December 31, 2016.

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Cash Provided By (Used In) Investing Activities from Continuing Operations: Cash used in investing activities from continuing operations in the fourth quarter of 2017 totalled $0.1 million relating to the purchase of miscellaneous shop equipment. This compared to $0.1 million cash used in investing activities in the fourth quarter of 2016 for transactions costs for the sale of Chadwick-BaRoss Inc. The components of the cash used in investing activities from continuing operations are as follows:

($ millions) 2017 2016

Proceeds from sale of Chadwick-BaRoss Inc. $ - $ (0.1)

Purchase of capital assets (0.1) -

Cash used in investing activities

- continuing operations (0.1) (0.1)


Cash used in investing activities (0.1)$ (0.2)$


Cash Provided By (Used In) Financing Activities in Continuing Operations: In the fourth quarter of 2017, net cash of $1.5 million was provided by financing activities in continuing operations, which compared to net cash of $1.0 million used in financing activities in continuing operations in the fourth quarter of 2016. During the quarter, the Company increased its bank borrowing by $2.1 million, paid $0.6 million for finance leases and repaid long-term equipment notes by $0.1 million. The components of cash provided by financing activities in continuing operations in the fourth quarter are summarized as follows:

($ millions) 2017 2016

Increase (decrease) in bank indebtedness $ 2.1 $ (0.2)

Repayment of finance lease obligations (0.5) (0.6)

Repayment of notes payable (0.1) (0.2)

Cash provided by (used in) financing activities

- continuing operations 1.5 (1.0)

- discontinued operations - -

Cash provided by (used in) financing activities 1.5 (1.0)


SUMMARY OF QUARTERLY DATA In general, business activity follows a weather-related pattern of seasonality. Typically, the first quarter is the weakest of the year as construction and infrastructure activity is constrained in the winter months. This is followed by a strong gain in the second quarter as construction and other contracts begin to be tendered and companies begin to prepare for summer activity. The third quarter generally tends to be slightly slower from an equipment sales standpoint, which is partially offset by continued strength in equipment rentals and customer support activities. Fourth quarter activity generally strengthens as customers make year-end capital spending decisions and exercise purchase options on equipment which has previously gone out on RPOs. In addition, purchases of snow removal equipment are typically made in the fourth quarter.

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A summary of quarterly results for the current and previous two years is as follows:

2017

($ millions, except per share amounts) Q4 Q3 Q2 Q1

Revenue $ 93.6 $ 83.3 $ 95.9 $ 83.2

Loss before income taxes from continuing operations (0.9) 0.2 (0.5) (1.1)

Net loss from continuing operations (0.9) 0.2 (0.5) (1.1)

Net loss (0.9) 0.2 (0.5) (1.1)


- loss from continuing operations $ (0.07) $ 0.02 $ (0.04) $ (0.08)

- net loss $ (0.07) $ 0.02 $ (0.04) $ (0.08)

2016


Revenue $ 81.2 $ 86.7 $ 102.2 $ 91.2

Income (loss) before income taxes from continuing operations (6.2) (19.1) (7.3) (1.1)

Net income (loss) from continuing operations (6.1) (26.1) (5.3) (0.9)

Net income (loss) (6.3) (23.1) (4.8) (0.7)

Basic and diluted earnings per share

- income (loss) from continuing operations $ (0.46) $ (1.97) $ (0.40) $ (0.07)

- net income (loss) $ (0.47) $ (1.75) $ (0.37) $ (0.05)

2015


Revenue $ 101.4 $ 87.3 $ 102.1 $ 94.1

Income (loss) before income taxes from continuing operations (7.4) (3.4) 0.3 (1.7)

Net income (loss) from continuing operations (5.5) (2.5) 0.3 (1.3)

Net income (loss) (5.3) (2.1) 0.9 (0.8)

Basic and diluted earnings per share

- income (loss) from continuing operations $ (0.41) $ (0.19) $ 0.02 $ (0.09)

- net income (loss) $ (0.40) $ (0.16) $ 0.06 $ (0.06)

A discussion of the Company’s previous quarterly results can be found in the quarterly Management’s Discussion and Analysis reports available on SEDAR at www.sedar.com. CONTRACTUAL OBLIGATIONS The Company has contractual obligations for operating lease commitments totaling $60.1 million. In addition, the Company has contingent contractual obligations where it has agreed to buy-back equipment from customers at the option of the customer for a specified price at future dates (“buy-back contracts”). These buy-back contracts are subject to certain conditions being met by the customer and range in term from 3 to 10 years. The Company’s maximum potential losses pursuant to the majority of these buy-back contracts are limited, under an agreement with a third party, to 10% of the original sale amounts. In addition, this agreement provides a financing arrangement in order to facilitate the buy-back of equipment. As at December 31, 2017, outstanding buy-back contracts totalled $3.5 million, which compared to $5.6 million at December 31, 2016. A reserve of $0.1 million has been accrued in the Company’s accounts as at December 31, 2017 with respect to these commitments, compared to a reserve of $0.1 million a year ago.


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Contractual obligations are set out in the following tables. Management believes that the Company will generate sufficient cash flow from operations to meet its contractual obligations.

Less than 1 to 3 4 to 5 After 5

($ millions) Total 1 Year years years years

Operating leases $60.1 $9.0 $14.9 $12.8 $23.4

Payment due by period

Less than 1 to 3 4 to 5 After 5

($ millions) Total 1 Year years years years

Buy-back contracts $3.5 $1.2 $1.6 $0.7 $0.0

Contingent obligation by period

SHAREHOLDER CAPITAL The Company is authorized to issue an unlimited number of shares. All shares are of the same class of common shares with equal rights and privileges. There were no changes in issued and outstanding shares during 2017 nor during 2018 as at the date of this MD&A.

Common Shares Issued and Outstanding Shares

Common shares outstanding as at December 31, 2016 13,221,719

Common shares issued -

Common shares redeemed -

Common shares outstanding as at December 31, 2017 13,221,719 The Company did not grant any options during 2017. NON-IFRS MEASURES “EBITDA” refers to earnings before interest, income taxes, impairment of intangible assets, amortization of capital assets, amortization of equipment inventory on rent, and amortization of rental fleet. EBITDA is presented as a measure used by many investors to compare issuers on the basis of ability to generate cash flow from operations. EBITDA is not a measure of financial performance or earnings recognized under International Financial Reporting Standards (“IFRS”) and therefore has no standardized meaning prescribed by IFRS and may not be comparable to similar terms and measures presented by other similar issuers. The Company’s management believes that EBITDA is an important supplemental measure in evaluating the Company’s performance and in determining whether to invest in shares. Readers of this information are cautioned that EBITDA should not be construed as an alternative to net income or loss determined in accordance with IFRS as indicators of the Company’s performance or to cash flows from operating, investing and financing activities as measures of the Company’s liquidity and cash flows. “Funded Debt” refers to bank indebtedness, equipment notes payable, notes payable and obligations under finance leases, net of cash. Funded Debt is a term defined by the Company’s bank and equipment note lenders to measure the Company’s leverage relative to net shareholders equity. Funded Debt is not a measure recognized under International Financial Reporting Standards (“IFRS”) and therefore has no standardized meaning prescribed by IFRS and may not be comparable to similar terms and measures presented by other similar issuers. The Company’s management believes that Funded Debt is an important supplemental measure in evaluating the Company’s ability to raise debt. Readers of this information are cautioned that Funded Debt should not be construed as an alternative to liabilities determined in accordance with IFRS or to cash flows from operating, investing and financing activities.

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CRITICAL ACCOUNTING ESTIMATES The preparation of financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabili ties in the financial statements. The Company bases its estimates and assumptions on past experience and various other assumptions that are believed to be reasonable in the circumstances. This involves varying degrees of judgment and uncertainty which may result in a difference in actual results from these estimates. The more significant estimates are as follows: Inventory Valuation The value of the Company’s new and used equipment is evaluated by management throughout each year. Where appropriate, a provision is recorded against the book value of specific pieces of equipment to ensure that inventory values reflect the lower of cost and estimated net realizable value. The Company identifies slow moving or obsolete parts inventory and estimates appropriate obsolescence provisions by aging the inventory. The Company takes advantage of supplier programs that allow for the return of eligible parts for credit within specified time periods. The inventory provision as at December 31, 2017 with changes from December 31, 2016 is as follows:

Provision for Inventory Obsolescence ($ millions)

Provision for inventory obsolescence as at December 31, 2016 $ 4.6

Provision related to inventory disposed of during the year (1.0)

Additional provisions made during the year 0.5

Provision for inventory obsolescence as at December 31, 2017 $ 4.1 Allowance for Doubtful Accounts The Company performs credit evaluations of customers and limits the amount of credit extended to customers as appropriate. The Company is however exposed to credit risk with respect to accounts receivable and maintains provisions for possible credit losses based upon historical experience and known circumstances. The allowance for doubtful accounts as at December 31, 2017 with changes from December 31, 2016 is as follows:

Allowance for Doubtful Accounts ($ millions)

Allowance for doubtful accounts as at December 31, 2016 $ 0.4

Accounts written off during the year (0.1)

Amounts unused and reversed -

Additional provisions made during the year 0.3

Allowance for doubtful accounts as at December 31, 2017 $ 0.6 Post-Retirement Obligations Strongco performs a valuation at least every three years to determine the actuarial present value of the accrued pension and other non-pension post-retirement obligations. Pension costs are accounted for and disclosed in the notes to the financial statements on an accrual basis. Strongco records employee future benefit costs other than pensions on an accrual basis. The accrual costs are determined by independent actuaries using the projected benefit method prorated on service and based on assumptions that reflect management's best estimates. The assumptions were determined by management recognizing the recommendations of Strongco’s actuaries. These key assumptions include the rate used to discount obligations, the expected rate of return on plan assets, the rate of compensation increase and the growth rate of per capita health care costs. The discount rate is used to determine the present value of future cash flows that management expects will be required to pay employee benefit obligations. Management’s assumptions of the discount rate are based on current interest rates on long-term debt of high-quality corporate issuers. In accordance with IAS 19, the assumed return on pension plan assets is based on the same discount rate used to determine the present value of future cash flows as described above. The costs of employee future benefits other than pension are determined at the beginning of the year and are based on assumptions for expected claims experience and future health care cost inflation. Changes in assumptions will affect the accrued benefit obligation of Strongco’s employee future benefits and the future years’ amounts that will be charged to results of operations. Future Income Taxes At each quarter end the Company evaluates the value and timing of the Company’s temporary differences. Future income tax assets and liabilities, measured at substantively enacted tax rates, are recognized for all temporary differences caused when the tax bases of assets and liabilities differ from those reported in the consolidated financial statements. Changes or differences in these estimates or assumptions may result in changes to the current or future tax balances on the consolidated balance sheet, a charge or credit to income tax expense in the consolidated statements of earnings and may result

19

in cash payments or receipts. Where appropriate, the provision for future income taxes and future income taxes payable are adjusted to reflect management’s best estimate of the Company’s future income tax accounts. RISKS AND UNCERTAINTIES Strongco’s financial performance is subject to certain risk factors which may affect any or all of its business sectors. The following is a summary of risk factors which are felt to be the most relevant. These risks and uncertainties are not the only ones facing the Company. Additional risks and uncertainties not currently known to the Company or which it currently considers immaterial, may also impair operations of the Company. If any such risks actually occur, the business, financial condition, or liquidity and results of operations of the Company, its ability to make cash dividends to shareholders and the trading price of the Company’s shares could be adversely affected. BUSINESS AND ECONOMIC CYCLES Strongco operates in a capital intensive environment. Strongco’s customer base consists of companies operating in the construction and urban infrastructure, aggregates, forestry, mining, municipal, utility, industrial and resource sectors which are all affected by trends in general economic conditions within their respective markets. Changes in interest rates, commodity prices, exchange rates, availability of capital and general economic prospects may all impact their businesses by affecting levels of consumer, corporate and government spending. Strongco’s business and financial performance is largely affected by the impact of such business cycle factors on its customer base. The Company has endeavoured to minimize this risk by: (i) operating in various geographic territories across Canada and in the United States with the belief that not all regions are subject to the same economic factors at the same time, (ii) serving a variety of industries which respond differently at different points in time to business cycles, and (iii) seeking to increase the Company’s focus on customer support (parts and service) activities which are less subject to changes in the economic cycle. OIL PRICES The Company operates in the province of Alberta and a portion of its business is tied directly to activity in the oil sands area in northern Alberta. The level of activity in northern Alberta and to a degree, the entire economy in the province, is impacted by changes in oil prices. In particular, a decline in the price of oil could have an impact on the exploration and development activities and capital expenditure plans of oil companies in northern Alberta, as well as construction and infrastructure spending throughout the province, which could in turn reduce the demand for the Company’s products and services. The Company believes an element of this risk is mitigated by its diverse customer base and broad offering of products used in various applications not directly impacted by oil prices. COMPETITION Strongco faces strong competition from various distributors of products that compete with the products it sells. The Company competes with regional and local distributors of competing product lines. Strongco competes on the basis of: (i) relationships maintained with customers over many years of service; (ii) prompt customer service through a network of sales and service facilities in key locations; (iii) access to products; and (iv) the quality and price of its products. In most product lines in the majority of the geographic areas in which Strongco operates, its main competitors are dealers who distribute or rent products manufactured by Caterpillar, John Deere, Komatsu, Hitachi, and other smaller brands. MANUFACTURER RISK Most of Strongco’s equipment distribution business consists of selling and servicing mobile equipment products manufactured by others. As such, Strongco’s financial results may be directly impacted by: (i) the ability of the manufacturers it represents to provide high quality, innovative and widely accepted products on a timely and cost-effective basis and (ii) the continued independence and financial viability of such manufacturers. Most of Strongco’s equipment distribution business is governed by distribution agreements with the original equipment manufacturers (“OEMs”), including Volvo, Case and Manitowoc. These agreements grant the right to distribute the manufacturer’s products within defined territories which typically cover an entire province. It is an industry practice that, within a defined territory, a manufacturer grants distribution rights to only one distributor. This is true for the majority of the distribution arrangements entered into by Strongco. Most distribution agreements are cancellable upon 60 to 90 days notice by either party. Some of Strongco’s equipment suppliers provide floor plan financing to assist with the purchase of equipment inventory. In some cases this is done by the manufacturer, and in other cases the manufacturer engages a third party lender to provide the financing. Floor plan arrangements include an interest-free period of up to twelve months. The termination of one or more of Strongco's distribution agreements with its OEMs, as a result of a change in control of the manufacturer or otherwise, may have a negative impact on the operations of Strongco.

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In addition, availability of products for sale is dependent upon the absence of significant constraints on supply of products from OEMs. During times of intense demand or during any disruption of the production of such equipment, Strongco's equipment manufacturers may find it necessary to allocate their limited supply of particular products among their distributors. The ability of Strongco to maintain and expand its customer base is dependent upon the ability of Strongco’s suppliers to continuously improve and sustain the high quality of their products at a reasonable cost. The quality and reputation of their products is not within Strongco’s control and there can be no assurance that Strongco’s suppliers will be successful in improving and sustaining the quality of their products. The failure of Strongco’s suppliers to maintain a market presence could have a material impact upon the earnings of the Company. The Company believes that this element of risk has been mitigated through the representation of its equipment manufacturers with demonstrated ability to produce a competitive, well accepted, high-quality product range and by distributing products of multiple manufacturers. In addition, distribution agreements with these manufacturers are cancellable by either party within a relatively short notice period as specified in the relevant distribution agreement. However, Strongco believes that it has established strong relationships with its key manufacturers and continues to strive for increased market share for their products which management believes has minimized the risk of distribution agreements being cancelled. CONTINGENCIES In the ordinary course of business, the Company may be exposed to contingent liabilities in varying amounts and for which provisions have been made in the consolidated financial statements as appropriate. These liabilities could arise from litigation, environmental matters or other sources. As at December 31, 2017, there are no amounts accrued for contingent liabilities. DEPENDENCE ON KEY PERSONNEL The expertise and experience of its senior management is an important factor in Strongco's success. Strongco's continued success is thus dependent upon its ability to attract and retain experienced management. FOREIGN EXCHANGE While the majority of the Company’s sales are in Canadian dollars, significant portions of its purchases are in US dollars. While the Company believes that it can maintain margins over the long term, short, sharp fluctuations in exchange rates may have a short-term impact on earnings. In order to minimize the exposure to fluctuations in exchange rates, the Company enters into foreign exchange forward contracts on a transaction-specific basis. INTEREST RATE Interest rate risk arises from potential changes in interest rates which impacts the cost of borrowing. The majority of the Company’s debt is floating rate debt which exposes the Company to fluctuations in short-term interest rates. See discussion under “Cash Flow, Financial Resources and Liquidity” above. RISKS RELATING TO THE SHARES Unpredictability and Volatility of Share Price A publicly-traded company will not necessarily trade at values determined by reference to the underlying value of its business. The prices at which the shares will trade cannot be predicted. The market price of the shares could be subject to significant fluctuations in response to variations in quarterly operating results and other factors. The annual yield on the shares as compared to the annual yield on other financial instruments may also influence the price of shares in the public trading markets. In addition, the securities markets have experienced significant price and volume fluctuations from time to time in recent years that often have been unrelated or disproportionate to the operating performance of particular issuers. These broad fluctuations may adversely affect the market price of the shares. LEVERAGE AND RESTRICTIVE COVENANTS The existing credit facilities contain restrictive covenants that limit the discretion of Strongco’s management with respect to certain business matters and may, in certain circumstances, restrict the Company’s ability to pay dividends, which could adversely impact cash dividends on the shares. These covenants place restrictions on, among other things, the ability of the Company to incur additional indebtedness, to create other security interests, to complete amalgamations and acquisitions, make capital expenditures, to pay dividends or make certain other payments and guarantees and to sell or otherwise dispose of assets. The existing credit facilities also contain financial covenants requiring the Company to satisfy financial ratios and tests, (see discussion under “Cash Flow, Financial Condition and Liquidity” above). A failure of the Company to comply with its obligations under the existing credit facilities could result in an event of default which, if not cured or waived, could permit the acceleration of the relevant indebtedness. The existing credit facilities are secured by customary security for transactions of this type, including first ranking

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security over all present and future personal property of the Company, a mortgage over the Company’s central real property and an assignment of insurance. If the Company is not able to meet its debt service obligations, it risks the loss of some or all of its assets to foreclosure or sale. There can be no assurance that, at any particular time, if the indebtedness under the existing credit facilities were to be accelerated, the Company’s assets would be sufficient to repay in full that indebtedness. The existing credit facilities are payable on demand following an event of default and are renewable annually. If the existing credit facilities are replaced by new debt that has less favourable terms or if the Company cannot refinance its debt, funds available for operations may be adversely impacted. RESTRICTIONS ON POTENTIAL GROWTH The payout by the Company of a significant portion of its operating cash flow will make additional capital and operating expenditures dependent on increased cash flow or additional financing in the future. Lack of those funds could limit the future growth of the Company and its cash flow. DISCLOSURE CONTROLS AND INTERNAL CONTROLS OVER FINANCIAL REPORTING Disclosure Controls Management is responsible for establishing and maintaining disclosure controls and procedures in order to provide reasonable assurance that material information relating to the Company is made known to them in a timely manner and that information required to be disclosed is reported within time periods prescribed by applicable securities legislation. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based on management’s evaluation of the design and effectiveness of the Company’s disclosure controls and procedures, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that these controls and procedures are designed and operating effectively as of December 31, 2017 to provide reasonable assurance that the information being disclosed is recorded, summarized and reported as required. Internal Controls Over Financial Reporting Management is responsible for establishing and maintaining adequate internal controls over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS. Internal control systems, no matter how well designed, have inherent limitations and therefore can only provide reasonable assurance as to the effectiveness of internal controls over financial reporting, including the possibility of human error and the circumvention or overriding of the controls and procedures. Management used the Internal Control – Integrated Framework published by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) as the control framework in designing its internal controls over financial reporting. Based on management’s design and testing of the effectiveness of the Company’s internal controls over financial reporting, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that these controls and procedures are designed and operating effectively as of December 31, 2017 to provide reasonable assurance that the financial information being reported is materially accurate. During the year ended December 31, 2017, there have been no changes in the design of the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, its internal controls over financial reporting. FORWARD-LOOKING STATEMENTS This Management’s Discussion and Analysis contains forward-looking statements that involve assumptions and estimates that may not be realized and other risks and uncertainties. These statements relate to future events or future performance and reflect management’s current expectations and assumptions which are based on information currently available to the Company’s management. The forward-looking statements include but are not limited to: (i) the ability of the Company to meet contractual obligations through cash flow generated from operations, (ii) the expectation that customer support revenues will grow following the warranty period on new machine sales, and (iii) the outlook for 2018. There is significant risk that forward-looking statements will not prove to be accurate. These statements are based on a number of assumptions, including, but not limited to, continued demand for Strongco’s products and services. A number of factors could cause actual events, performance or results to differ materially from the events, performance and results discussed in the forward-looking statements. The inclusion of this information should not be regarded as a representation of the Company or any other person that the anticipated results will be achieved and investors are cautioned not to place undue reliance on such information. These forward-looking statements are made as of the date of this MD&A, or as otherwise stated and the Company does not assume any obligation to update or revise them to reflect new events or circumstances. Additional information, including the Company’s Annual Information Form, may be found on SEDAR at www.sedar.com.


strongco corporation management’s discussion and analysis · 2019-05-08 · 1 strongco...

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